Safeway Plans Acquisitions After Lifestyle Rollout

After Safeway completes the conversion of most of its stores to the lifestyle format in 2009, it plans to set out on the acquisition trail, Steve Burd, chairman, president and chief executive officer, told shareholders last week here at the company's annual meeting. Although we haven't done anything of scale lately, we see ourselves getting back to acquisitions after the lifestyle

PLEASANTON, Calif. — After Safeway completes the conversion of most of its stores to the lifestyle format in 2009, it plans to set out on the acquisition trail, Steve Burd, chairman, president and chief executive officer, told shareholders last week here at the company's annual meeting.

“Although we haven't done anything of scale lately, we see ourselves getting back to acquisitions after the lifestyle stores are complete,” he said.

He also said Safeway will explore other growth vehicles.

Although he did not mention anything specific, reports are circulating in Northern California that Safeway may open a single freestanding restaurant in the region in the next few months to serve as a test kitchen for the food-service side of its business.

Local sources said the restaurant — located in a mall behind the chain's store in Redwood City, Calif. — is not intended as a prototype but simply as a way to quietly test culinary ideas for use at the store level.

The store will reportedly be supplied exclusively with products from the chain's own distribution system, the sources said.

Safeway declined comment when questioned by SN about the reports.

During the meeting, Burd said conversion of Safeway locations to the lifestyle format is about 50% completed, and with conversions continuing at a rate of 300 per year, that figure is expected to increase to 60% by the end of this year and 90% by the end of 2009, Burd said.

As Safeway looks for other ways to grow, it is “entertaining the possibility,” Burd said, of trying different formats “that would represent a significant growth vehicle, and occasionally we look at businesses related to our primary business.”

“We finally got a glimpse of the post-lifestyle strategy for Safeway, and it is encouraging,” Perry Caicco, an analyst with CIBC World Markets, Toronto, said in a written note.

“We have been concerned that, other than Blackhawk [Safeway's third-party gift card business], there seemed to be no ‘second act’ at Safeway.”

According to Caicco, potential acquisition possibilities could include Ahold's U.S. operations, A&P/Pathmark and Whole Foods Market. “We see nothing as imminent,” he said, “and would prefer that Safeway focuses in the near term on refining, improving and delivering more consistently on lifestyle.”

BIGGER OPPORTUNITIES

Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, said Safeway is smart to concentrate on smaller, in-market acquisitions while the industry continues to consolidate “so it can look at bigger opportunities after smaller regional players coalesce into bigger companies. In the case of a company like Ahold, all of the underperforming pieces will likely be gone by 2009, and what's left will be stronger operations with more viable market shares.”

Cerankosky said it would be a good idea for Safeway to try different formats “to adapt to demographic changes at some locations. And it's already seen what other retailers, like Kroger, have been able to do offering a variety of formats.”

He said a restaurant “sounds like a research and development project that makes sense, because it will give Safeway a chance to see how people respond to prepared foods.”

Meredith Adler, an analyst with Lehman Brothers, New York, expressed less enthusiasm about Safeway's long-term acquisition prospects. “The numbers say its track record on previous acquisitions is very mixed,” she said, “and it's not clear if it has learned from its mistakes at Dominick's, Randalls and Genuardi's — though, to be fair, Texas was a tough geography to begin with, and Safeway did learn from its experience at Genuardi's and got things back on track there.”

She said the prospect of opening a restaurant “is a clever idea” on Safeway's part.

During the annual meeting, Burd said Safeway was boosting its quarterly dividend by 20% — to 6.9 cents per share from 5.75 cents per share, effective July 19. When his announcement did not elicit any reaction from the audience, Burd commented wryly, “For 13 years people asked us when we would have a dividend, but I guess they're not here today.”

In other annual meeting highlights:

Burd said lifestyle store remodels continue to generate strong returns — 37% overall in 2006, or three times the cost of capital. “Even lifestyle stores in areas where annual incomes are below $40,000 are generating returns just under 30%,” he noted, “and we believe the returns as we remodel the remaining 50% of our stores should be the same or greater than those at the first 50%.”

Blackhawk — the company's alternate payments business that Burd said is the largest provider of third-party gift cards in North America — should grow sales at 80% a year over the next five years and is expected to contribute $100 million to pre-tax income.

Burd said Blackhawk has already expanded to Canada, Mexico and the United Kingdom, with Germany, France and Australia on the growth agenda. “It costs less to open a new market [with Blackhawk] than to remodel a store,” Burd pointed out.

Stockholders rejected several shareholder proposals during the meeting, including a proposal to have cumulative voting for directors (which got a 63% “no” vote); a proposal for an independent director to serve as chairman (86% “no”); a suggestion by People for the Ethical Treatment of Animals to consider buying from suppliers who practice controlled-atmosphere killing of chickens (91% “no”); and a proposal for labeling cloned and genetically engineered products (92% “no”).

Shareholders approved Safeway proposals to change the company's equity and incentive award plan to provide additional incentives for executives and key employees (90% “yes”) and to amend the company's capital performance bonus plan for executives and key employees by setting a new set of preestablished performance goals and increasing the maximum amounts payable to participants (98% “yes”).

They also voted to reelect all nine directors whose terms were up, including Burd.